Thursday, November 28, 2013

Happy Thanksgiving 2013!

Today is Thanksgiving in the US.  I am reposting here an article I wrote in 2011 for the Singapore Straits Times on the unique American nature of Thanksgiving.  Happy Thanksgiving!

Wednesday, November 27, 2013

ASEAN's (Limited?!) Role in Typhoon Haiyan Relief

In the aftermath of Typhoon Haiyan, there have a been a few articles lamenting the slow pace of ASEAN’s response to the disaster recovery, in the Bangkok Post and elsewhere.  Although I agree that the disaster recovery efforts in the Philippines may appear to be relatively slow and ineffective, much of the problems are related to domestic obstacles in the Philippines, and too much “blame” in my opinion is being placed on the ASEAN institutions.

Those comparing ASEAN’s reaction in Typhoon Haiyan with that of the US federal government in the Katrina hurricane disaster aftermath do not properly acknowledge the key difference between the two situations.  The US federal government had full authority to nationalize the situation but did not do so immediately, for whatever reasons.  ASEAN, on the other hand, has no such authority to intervene directly in the Philippines.  

The core principle of non-interference in domestic affairs, and the fact that ASEAN as a regional bloc operates mostly as a club of national governments, mean that ASEAN as an institution is relatively limited in what it can and cannot do in the current situation.  When dealing with the national leadership of an ASEAN member, ASEAN institutions have been effective in dealing with disaster relief and disaster planning.

For example, after Cyclone Nargis, the Myanmar regime initially refused to accept foreign relief aid.  Only after peer pressure from the other ASEAN members did the regime accept such aid.  The reversal of the Myanmar military regime’s decision may even have helped trigger the political and economic reforms now going on in the country.

In another example, during the avian flu scare, multinational drug companies offered to donate vaccines and medicines to ASEAN.  Singapore had sufficient facilities to store the medicine, and was centrally located as a transportation hub to distribute the medicine should the occasion arise.  However, for its own reasons Malaysia objected to Singapore as the base country, causing an impasse where neither country could accept the medicine, since neither country could act on behalf of ASEAN.  The ASEAN Secretary General then acted to break the impasse and accepted the medicines on his own authority  as ASEAN Secretary General.  This is a rarely reported, and frankly, commendable act by the ASEAN Secretary General.

Thus, the ASEAN institutions can be effective, particularly when dealing with the national level governments in disaster relief.  This is what ASEAN offered before and after Typhoon Haiyan, and the Philippine government has been cooperating with ASEAN and other foreign donors.  The more difficult task for ASEAN institutions is what to do when peer pressure does not seem to work or an ASEAN member may be willing to comply, but lacks the capability or competency to implement its ASEAN commitments.  The annual haze is an example of both types of situations, whereas the Typhoon Haiyan situation may be an example of the latter type.  All of the aid money in the world is not going to help the victims in the Philippines if the funds are not spent well by those on the ground.

The criticism of ASEAN should therefore be viewed with these institutional limitations in mind.   That is not to say that more aid funding should not be forthcoming from ASEAN; the other ASEAN member states need to step up their funding to another member of ASEAN.  However, it is off the mark to criticize ASEAN for other aspects of the recovery effort which are not really in its remit but are under that of the Philippine government.   

In any event, there will be more disasters for ASEAN to face. Some will be dramatic like Typhoon Haiyan, some will be continuing, like AIDS and other public health issues, and others will be both visible and continuing, like the haze.  The cross-border nature of these disasters means that ASEAN is well placed to deal with these disasters – if the ASEAN institutions are properly supported and augmented.  That needs to be done before the next disaster springs upon the region.

Wednesday, November 13, 2013

Preah Vihear: After the ICJ Ruling, ASEAN Needed More than Ever

This week the International Court of Justice (ICJ) issued a ruling that elaborated on its 1962 judgment in the Cambodia-Thailand border dispute involving the Preah Vihear temple.   I will leave it to more learned practitioners of international border disputes and the ICJ to provide detailed legal analysis of the decision.   Instead, this post focuses on the implications of the ruling for ASEAN.

Basically, Cambodia won a partial victory.  The ICJ ruled that the temple and the promontory around the temple were Cambodian territory, following from the 1962 ICJ ruling.  However, the ICJ rejected Cambodia’s argument that the 1962 ruling also covered another stretch of disputed territory, the hill of Phnom Trap such that the ICJ did not address the substance of Cambodia’s arguments.  In this, Thailand can claim some partial satisfaction from the ruling.  Both sides said that they would engage in negotiations over the remaining dispute. 

The ICJ ruling neatly follows the rules of judicial economy, which is helpful in the current circumstances.  By not ruling on all of Cambodia’s claims, the ICJ avoided issuing a decision that would have been totally unacceptable to one side or the other.  The Thais, in particular, would have been incensed had the ICJ ruled that Phnom Trap was in Cambodian territory.

As it stands, Thailand and Cambodia both have reasons to accept the ruling, at least as it pertains to Preah Vihear itself.  The ICJ ruling is a tactical victory for the Hun Sen government, which has been weakened by its poor election performance but still dominates Cambodia. The Yingluck Shinawatra government has the more difficult balancing task in Thailand.  It does not want to prolong the dispute with the Hun Sen government, with which it is more friendly, but it also does not want to provoke the Thai opposition into mass demonstrations which could encourage a change in government.

Thus, as ever, the course of the Preah Vihear dispute will depend on Thai domestic politics.  If the Yingluck government feels that it must act more aggressively to fend off domestic critics or a more antagonistic government rises to power in Thailand, the remaining dispute regarding Phnom Trap could be a potential conflict point.  However, unlike the Preah Vihear dispute, the ICJ would not provide immediate recourse; a fresh case would have to be brought, which could take years. 

In this context, ASEAN  and the ASEAN institutions need to be willing, and more importantly, able to intervene if and when the Cambodia-Thailand dispute flares up again.  Indonesia, acting as ASEAN Chair, successfully intervened in 2011 by brokering a stand down.  Myanmar as 2014 ASEAN Chair and Malaysia as 2015 ASEAN Chair have no vested interests in the dispute, and the ASEAN Secretary General Le Luong Minh is from Vietnam, which is also viewed as neutral in the dispute.  Hence from a diplomatic point of view, these actors will have more credibility to act on behalf of ASEAN should a Cambodia-Thailand dispute arise.

The real question is whether the ASEAN institutions are up to the task. The ASEAN Treaty of Amity and Cooperation’s High Council and the dispute settlement procedures available under the ASEAN Charter have never been invoked.  Cambodia and Thailand may not want to subject themselves to a dispute procedure run by their ASEAN peers, but beefing up those tools would at least give Cambodia and Thailand the practical option of using ASEAN procedures, and give the ASEAN institutions more credibility from a structural point of view. In this sense, more dispute resolution tools would be helpful, but only if they are seen as viable options by the parties involved.  Strengthening the ASEAN institutions and procedures thus would help avoid further bloodshed in the Cambodia-Thailand border dispute.

Monday, November 11, 2013

Timor Leste in ASEAN? Not in 2014

Last week the Myanmar Times had an article on Timor Leste's bid to join ASEAN.  The article quoted several sources as stating that Timor Leste would not be close to joining ASEAN in 2014:

"the [Myanmar] government believes Timor Leste has a number of shortcomings that make joining the group in 2014 impossible. . . . . Timor Leste has failed to build embassies in all 10 ASEAN member nations, a prerequisite under the current entry requirements. Timor Leste does not have an embassy in Myanmar but has said it plans to build one in Nay Pyi Taw."

Myanmar's opinion on this is quite important, as Myanmar will serve as ASEAN Chair in 2014.  However, other observers confirm that Timor Leste has not met the technical requirements for membership:

"Timor Leste remains the “poor cousin of geographic Southeast Asia” and sending representatives to numerous ASEAN meetings and summits, of which there are more than 1000 each year, would be a financial burden. Its lack of infrastructure, including road and air links, means it would also not be in a position to host large meetings of ASEAN officials."

I elaborated on these and other reasons for Timor Leste not joining ASEAN in one of the earliest posts on this blog here.  From the Myanmar Times article, it seems that Timor Leste has not yet made up enough ground to get into ASEAN any time soon. On the other hand, one could also say that ASEAN itself has not yet made sufficient progress on its regional integration efforts to take in Timor Leste.  In any event, with sufficient time and money, Timor Leste will catch up. The question remains whether ASEAN and the ASEAN institutions will be sufficiently developed to take in the country when it is ready.

Saturday, November 9, 2013

Industrial Subsidies and the AEC

I recently successfully defended two subsidy cases, an EU investigation on biodiesel from Indonesia, and a US investigation on shrimp from Malaysia.  After having also participated in subsidy cases involving other ASEAN members, including Indonesia, the Philippines, Singapore and Thailand, I thought this would be an appropriate occasion to reflect on subsidies in the ASEAN context.

ASEAN member states have been understandably reluctant to include subsidy issues on the ASEAN Economic Community agenda.  They are primarily focused on attracting investment, both foreign and domestic, into their countries.  Tax breaks and investment incentives are major tools used in these efforts.  Furthermore, government-owned or government-linked companies have significant roles in the ASEAN member states.  Thus any member raising such issues would be subject to counter-criticism within the bloc.  Subsidy issues tend to be raised only when they indirectly affect other aspects of trade and investment, such as when ASEAN member states apply border measures to prevent the outflow of subsidized commodities, i.e., agricultural goods or basic consumer products. 

The AEC’s primary focus on the single production base and secondary focus on the single market also means that the market distortive effects of subsidies are currently of lesser concern to ASEAN’s leaders.  This differs from the EU, where a single market and a single production base were created at the same time, meaning that subsidies, such as state aid to industries, that could distort the single market are subject to close scrutiny by the European Commission.  The absence of strong antitrust powers or coordination in the AEC is also unlike the role of the European Commission in the EU, and reflects ASEAN’s lesser emphasis on creating a true single market by 2015, despite the rhetoric from its leaders.

Thus, the major scrutiny of subsidies in ASEAN comes in the context of anti-subsidy (also known as countervailing duty) investigations conducted by ASEAN’s trading partners, namely the EU and the US.  Such investigations are allowed by the World Trade Organization, and permit the investigating countries to impose duties to offset subsidies benefitting imports from other countries.  Imposition of duties requires that the subsidies be “specific” to particular industries and regions or that they be export-oriented. The subsidies also must have caused material injury to the domestic industry of the importing country.  The EU and the US are the most prolific users of anti-subsidy laws, although Thailand and the Philippines have conducted their own anti-subsidy investigations.

ASEAN countries get targeted in anti-subsidy investigations primarily due to their policies to attract investments.  Reduced income tax rates or tax credits for foreign investors may be standard practice in ASEAN, but if the investors export to the EU or the US, they could be targeted in an anti-subsidy investigation.   For example, the tax holidays provided by the Thai Board of Investment for investing outside of the Bangkok region have been deemed to be countervailable subsidies by the EU and the US. The EU has found that the Philippines’ application of a reduced tax rate for large corporations is a subsidy, even though the reduced rate applies to gross revenue instead of net profits.  The US found that Malaysia’s Pioneer program provided a subsidy in the form of tax holidays for qualifying industries.  Borrowing from government export-import banks at reduced import rates can also confer a subsidy.  Less commonly investigated are outright grants by governments or debt forgiveness (such as the loans restructured following the 1998 Asian financial crisis). 

One major difference between the EU and the US is that the EU is more skeptical of free trade zones and bonded warehouses than the US is.  Such facilities enjoy duty-free status due to their operating outside the principal customs territory. The EU is of the view that without proper safeguards, manufacturers can receive excessive import duty exemptions, which constitute a subsidy.  The EU has been more aggressive in finding ASEAN customs authorities lacking in such safeguards, whereas the US has not (although in a recent case on shrimp from Vietnam the US questioned the reliability of Vietnam’s administration of its duty-free zones).

Vietnam, which is viewed as a “non-market” economy (NME), presents another set of issues.   In an NME, the government has such influence over the economy that the lines between the private and public sectors become irretrievably blurred. Purchases of raw materials from government linked companies can be deemed as subsidies, particularly when the sales are made at prices below international levels. In cases involving NMEs, this can become a major issue because every domestic supplier could be considered as government linked.

The most worrying trend comes from the EU, where the European Commission recently investigated the export tax system applied by Indonesia on the palm oil and palm oil derivative industries.  After conducting anti-dumping and anti-subsidy investigations on biodiesel from Indonesia manufactured from palm oil, the EU found that the export tax system did not constitute a countervailable subsidy and terminated its anti-subsidy investigation.  However, it then went on to find that the same system had distorted raw material prices in Indonesia and warranted the imposition of higher anti-dumping duties on biodiesel.  The worrisome aspect is that the EU has elected to use the anti-dumping duty laws to deal with the purported distortive effects of a government policy, when the WTO agreements clearly state that this should be dealt with by the anti-subsidy laws and their accompanying set of legal understandings and disciplines.  If this trend continues, ASEAN exporters could find themselves subjected to anti-dumping duties not because of their pricing practices, but because of the policies of their home governments.

Subsidies in ASEAN will thus continue to be the subject of external analysis by the EU and the US in their trade remedy investigations, as well as by the WTO’s trade review procedure. This will remain the case until the single market envisioned by the AEC matures and comes into fruition, requiring scrutiny for subsidy and antitrust issues, such as is the case in the EU.  Like other aspects of the AEC, this too requires strengthening the ASEAN institutions’ authority to monitor, oversee, implement, and sanction transgressions against the AEC.  Hopefully ASEAN’s leadership will take the first steps to making those improvements soon.